When you should -- and shouldn't -- pay refinancing points

Refinancing is essentially a numbers game -- you do it based on a favorable comparison between your existing mortgage and a potential new loan. But what do you do when the numbers don't line up for ready comparison?

Up-front points on a refinance mortgage can complicate comparisons, but don't let that complication scare you off. Opting to pay points can work to your advantage at times.

What skews the comparison between refinancing with points and your existing mortgage loan is that your existing loan effectively is without points -- even if it had them originally. That is because those points would have been paid up front, so your remaining payment schedule is just like that of a no-points loan.

An annual percentage rate (APR) calculator can help with this apples-and-oranges comparison, but only to some degree. That is because the significance of points can change depending on your circumstances. The following are some guidelines as to when you should and should not pay points on a refinance loan.

When to consider paying points on a refinance loan

It might be worth paying points:

If points lower your APR. Loans with points will typically offer lower ongoing interest rates than those without, but the key test is if the overall APR is lower when accounting for up-front points (plus the other costs involved in originating a loan, which should be factored into any refinancing calculation).

If you plan on owning the home for the long haul. The longer you plan to own your home, the more time there is for the up-front cost of points to be spread over the repayment period, and for you to benefit from any APR advantage.

15 Yr. Fixed - Refinance Rates from Our Lenders in VA

If you would break even quickly anyway. If you do not plan to own your home for a long time, but refinancing with points would quickly put you ahead of simply putting that up-front money into your existing loan, then the APR advantage might be great enough to make it worthwhile.

When to avoid points on a refinance loan

On the other hand, these are some red flags that indicate it is not worth refinancing with points:

If there is no clear APR advantage. If the APR is essentially the same after points and other up-front costs are considered, you might be better off keeping that up-front money in reserve against financial setbacks.

If you plan to sell your home in a few years. Points mean paying an extra up-front cost in exchange for a lower, long-term interest rate. If you do not plan to be in the house for the long term, there might not be enough chance for that trade-off to benefit you.

If you plan to pay off your mortgage very early. The same logic described above also applies if you plan on making heavy prepayments.

If putting the money into equity would more effectively lower your rate. Mortgages are often priced on loan-to-value (LTV) ratios. If you are near one of the LTV thresholds used for pricing, you may get more of an interest rate discount by lowering your LTV than by paying points.

Again, mortgage points are a complication when refinancing, but they may prove to be a worthwhile one. Just make sure you crunch the numbers in a way that is specific to your situation.